August 15, 2011
Retirement Planning - Now More Than Ever
By Robert Spielman, Partner, Tax & Business
Today, fewer employers offer traditional company pension plans that guarantee specific income at retirement. After inflation, Uncle Sam does not provide as much income for retirement years as in prior years and people are living longer. These are all reasons why planning for retirement is vital in 2011. Planning for retirement may be tricky so you must use all the tools available to help with the task. Steps to take when planning for retirement:
- Determine your retirement income needs
- Save your money
- Use the right planning tools
Using a simple percentage of your current income to establish your retirement needs is not always a fool‐proof plan because it does not allow for special circumstances specific to you. Therefore, figuring your actual retirement expenses is a much better tool to address your needs. Start with your current expenses and consider how far away from retirement you are. Adjust the gap between your current and future expenses accordingly. Keep in mind that health care expenses will most likely increase as you reach retirement, and do not neglect inflation when making your projections.
Map out a savings plan based on the age you plan to retire, your life expectancy (available on the internet), and whether you expect to dip into your principal or not. Always assume a conservative rate of return (5 to 6 percent) when creating your savings plan. Select investments that are suitable for your circumstances; establish your risk tolerance, your goals, and your time horizon. Finally, use the right tools for retirement planning. Consider the following retirement options:
- Employer‐sponsored retirement plans – 401(k), 403(b), SIMPLE, and 457(b) plans. These plans are very powerful because your contributions are pretax. Investment earnings are tax deferred until withdrawn. Usually, employer‐matching contributions occur within these plans which make them highly attractive. If available, maximize your plan participation.
- IRAs – Traditional IRAs and Roth IRAs. Generally, the contributions you make to a traditional IRA are deductible, which lower your taxable income, and the withdrawals you take are taxable as ordinary income. Roth IRAs allow tax‐free withdrawals because contributions were made with after tax monies.
- Annuities – An annuity generally provides payments that begin sometime in the future (i.e. retirement), which may last for your life or for some specified term of years. Annuities are funded with after‐tax dollars and allow for tax deferred growth, with a measure of payout security.
The IRS has mandated new rules for 2011 IRA contributions. The modified AGI limit for traditional IRA contributions is increased. If you are covered by a retirement plan at work, your deduction for contributions to a Traditional IRA may increase as the modified AGI limitation has been raised, increasing taxpayers’ abilities to save for retirement.
- The Modified AGI limitation has been increased so if your AGI is more than $90,000 but less than $110,000 for a married couple filing joint, or a qualifying widow(er) you may make IRA contributions. If you live with your spouse or file a joint return and your spouse is covered by a retirement plan, but you are not, your deduction is phased out if your modified AGI is more than $169,000 but less than $179,000. If your modified AGI is over $179,000, you cannot take a deduction at all.
- If Modified AGI is more than $56,000 but less than $66,000 for a single individual or head of household you may contribute; and
- If Modified AGI is less than $10,000 for a married individual filing a separate return you may contribute.
Retirement Planning is a complex matter. There are many variables and numerous strategies that can be utilized.
Contact your Marcum professional to help you reach your retirement goals.